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In previous Broker Buy columns on thebull.com, analysts touted both AGL Energy (AGK) and Origin Energy (ORG) as two shares that actually stand to benefit from the hotly debated and disputed Carbon Tax, scheduled to go into effect in July 2012.  Strong opponents of the tax would claim if the shareholders of these companies benefit from the tax, they will be the only Australians who do!

So let us see if we can make a case for AGK.  Here is a relevant portion of the Broker Buy column.  

•    State One Stockbroking’s John Rawicki put together a list of companies offering strong market positions that are less likely to be buffeted by short-term market movements, with AGL firmly on that list.

We highlighted the phrase short-term market movements since retail investors and institutional investors everywhere are wondering how long these short-term movements will persist.  The wall of worry is building momentum and as of the first week in August, 2011, why would anyone want to be buying anything?  Here is a three month price chart for AGL, Origin, and the ASX:

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This is not a pretty picture, but how long will it last?  Is this a blip on the radar of Australia’s recent burgeoning growth or is the first leg in a downward slide?

Since January of 2011 Australian investors have been subjected to a slow drip of continuous bad news.  Natural disasters; Woolworth cutting its forecast for retail sales; fears of a housing bubble here and in China; declining home sales; falling consumer sentiment; debt and deficit problems around the world; the potential of a default in the United States; and now the Carbon Tax, which some critics claim will drag the Australian economy into a pit from which we will never climb out.

Australians have long felt isolated from some of the dangers evident in the broader world, especially when we have things the Chinese need.  You know what we say – She’ll be right, mate.

Yet recently released figures from the global purchasing managers index (PMI) showed a slowdown in China in July 2011.  And of course China buys from us and sells what it makes to the United States and Europe.

In the first week of August we learned manufacturing activity in the United States fell and consumer spending actually declined in July 2011 for the first time in two years.  In summary, there is a growing chorus that the current short term market movements are a harbinger of a major bear market about to roar as the United States economy descends into the dreaded double-dip recession.

Bear markets, however, come and go and fundamentally sound companies in the right sectors survive.  Right now, value investors the world over are checking the fundamentals of solid companies with declining share prices and they are getting ready to buy.  Their slogan is while everyone else was crying, I was buying.

So here are a few common sense observations about AGK.  First, it is a utility share and historically utilities have been safe havens in economic downturns.  While Australians may dial down the air conditioner a bit, few will shut it down completely and no one will begin reading books by candle light at night.  

The modern world runs on energy and AGK is the largest retail supplier of energy in Australia.  They provide energy to 3.2 million customers.  In addition, they are currently Australia’s largest renewable energy company, with renewable energy generation projects well underway.  Now let us see how market participants view AGK in comparison with Origin Energy.

Valuation Ratios

  AGK ORG Utilities/Energy Sector
P/E (Price to Earnings)  14.83  21.48 15.01/18.46
P/B (Price to Book)  1.1 1.38 1.15/1.61
P/EG (Price to Earnings Growth)   .6  1.05 1.75/1.2
P/S (Price to Sales) .96 1.66  2.11/10.2
DY (Dividend Yield)    4.2%   3.4 6.8/2.8

 

AGK is in the Utilities sector while ORG is in the Energy sector.  Origin’s higher P/E ratio suggests it might be a bit overpriced, although a PEG of 1 is considered a classic indication of a fair price.

AGK’s P/E is in line with the sector average but its PEG suggests growth potential.  Both pay dividends which help cushion the bruising shocks of a bear market.

Leverage Ratios/Total Debt/Debt to Equity

  AGK ORG Utilities/Energy Sector
Current Ratio  1.44 1.61 1.25/4.78
Quick Ratio 1.12 1.17 1.0/4.4
Total Long Term Debt $900.8m $3,373m N/A
Debt to Equity 15.5% 30.5% N/A

 

Neither company has liquidity problems.  The current and quick ratio indicate a company’s ability to meet its short term liabilities, including debt payments and accounts payable without resorting to additional borrowing.  You can see AGK’s long term debt is superior to ORG’s and they use less debt to fund operations and growth.

Check recent news releases and you will learn they recently strengthened their debt position with a new debt facility allowing the company to refinance current debt and fund the stgelopment of its Macarthur wind farm, the largest in the southern hemisphere which is expected to generate enough energy to power the equivalent of 222,000 homes.

There are other numbers we could look at, but they only augment a picture of solid past performance and our interest in AGK is as a safe haven for the future.  The carbon tax will provide incentives for cleaner power and AGK has the capability to provide it, both with gas-generated electricity and renewable energy.

If you spend time searching their website you can assess the viability of their growth plans.  The term, “widows and orphans stocks” is rarely used anymore, but decades ago it was descriptive of the kind of blue chip share, usually a utility, that was safe enough for widows and orphans to buy and not have to constantly worry about.  AGK may qualify as a modern day widows and orphan share.

While some investors might wait for a market bottom before investing, you need to remind yourself many experts think market timing is a fool’s game.  If you are concerned about another market crash, as we all should be, you can comfort yourself by looking at AGK’s share price movement since the onset of the GFC in 2008.

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>>Back to the newsletter to view other articles – August 6th 2011

 

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au.You should seek professional advice before making any investment decisions.